State BPA Fundamental Accounting Practice Exam

What does it indicate if an expense account shows a credit balance?

1. The account is balanced

2. There has been an error in postings

3. The account has reached its limit

4. Expenses have been under-reported

The correct answer is: There has been an error in postings

When an expense account shows a credit balance, it typically indicates that there has been an error in the postings. Expense accounts, by their nature, should generally have a debit balance since they reflect costs incurred by a business. A credit balance suggests that there may have been an entry made in error, such as an expense being mistaken for a revenue or a misclassification during journal entries. This anomaly needs to be investigated, as it does not align with standard accounting practices, where expenses are recorded as debits, thereby indicating that there is an issue with the bookkeeping or accounting process. In the context of other options, an account being balanced does not apply since a balanced account would show equal debits and credits, directly conflicting with a credit balance in an expense account. Similarly, stating that the account has reached its limit or that expenses have been under-reported does not align with the standard functionality of an expense account, further emphasizing that a credit balance in this context signals a recording mistake rather than a typical operational result.